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Small-Caps Slack

The bulls started 2017 with the way they closed out 2016 by keeping their momentum and pushing fresh all-time highs. The bears have been in hiding for two months but could start to growl if fourth-quarter earnings season gets off to a slow start.

The Financial stocks will be the center of attention as investors have already pushed many of the names in sector up double-digits. The Wall Street pros and talking heads have said the market, and these stocks in general, have come too far, too fast, and are due for a pullback. This week will either prove them right, or, the suit-and-ties will playing catchup on a sector that has lagged for years.

The Dow gained 64 points, or 0.3%, to end at 19,963 on Friday. The blue-chips traded to a low of 19,834 on the open with support at 19,800-19,725 holding. The upper end of this range has held since mid-December aside from the end of 2016 close at 19,762. The rebound to a record high of 19,999.63 missed the 20K mark by a third-point and the close between resistance at 19,900-20,000 was a bullish sign. There is additional blue-sky territory to 20,200-20,400 on a close above the latter.

The S&P 500 advanced 8 points, or 0.4%, to finish just under 2,277. The index slipped 5 points on the open to 2,264 with upper support at 2,260-2,250 holding strong. The lower end of this range has held since early December with the exception of a three-day span below this level. The December 30th close was at 2,238. The run to 2,282 set a lifetime intraday high and the close above 2,275 gets fresh fluff targets at 2,300-2,325 in play.

The Nasdaq jumped 33 points, or 0.6%, to settle at 5,521. Tech also fell a fiver on Friday’s open to 5,482 but easily held rising support at 5,475-5,450. I mentioned the 5,450 level would be a major test for the bulls and a level that has been in play since early December, as well. The surge to another all-time of 5,536 cleared prior resistance at 5,500-5,525. The close above the latter gets 5,575-5,625 in the mix.

The Russell 2000 fell 4 points, or 0.3%, to close at 1,367. The small-caps tested a high of 1,375 at the start of trading with resistance at 1,375-1,400 standing strong. The 52-week peak is north of 1,392. The backtest to 1,366 afterwards held support at 1,360-1,350. The end of December intraday low tapped 1,353 with the close at 1,357. The December 14th close was at 1,356. A possible early signal to go short would be on a close below 1,350.

The S&P 500 Volatility Index ($VIX, 11.32, down 0.35) bubbled to a high of 11.74 with lowered resistance at 12.50-13.50 holding for the third-straight session. The close below 11.50 was a bullish signal a test to 10 and single-digits could come. Friday’s low reached 10.98 and the 52-week low is at 10.93. I will talk more about the VIX in a moment.

Despite the Dow not triggering 20,000 on Friday, record highs across the board were a bullish sign a blowoff top could come over the next few weeks. Of course, this will depend on the strength of fourth-quarter earnings. Not only will 4Q numbers be in focus, full-year results and 2017 outlooks from companies will also be taken into consideration.

It is also important to note the major indexes are still in a mini-trading range that has been in play since early December. I mentioned last week much of the talk of “too far, too fast” has been overblown and that the real indicator we needed to watch was the VIX.

We haven’t heard anyone mention the VIX possibly trading below 10 and into the single-digits, like I have been predicting, and this remains a good thing. If this were to happen, it would be major news and an “obvious” sell signal to the pros with the tag line, “when the VIX is low, it’s time to go”.

The aforementioned VIX chart shows the 11 level has been in play two other times. The bears held this level in early August and again in early December. The three-year weekly chart below also shows the bears holding the 11-10 level in the summer of 2015 and throughout the summer in 2014.

A longer-term “death cross” has formed on the 3-year chart and this is a slightly bullish signal and why I think single-digits on the VIX is possible. There are periods in history were the VIX has stayed extremely low for weeks and months so keep this in mind. Of course, signs of trouble will be if lower levels of support hold and the VIX closes back above 13.50 this month.

One of the more bullish clues from last week’s shortened stretch were the higher Dow closes on Tuesday and Friday. Although the market has been closed the past two Monday’s, the opening Tuesday’s over the holiday’s were positive finishes. Two of the past three Friday’s have also seen the blue-chips trade higher.

Positive closes to bookend a week are usually a bullish signal as I often say it signals money is flowing into the market. Negative Monday/ Friday closes on the Dow can signal cash is moving out of the market. Mixed Monday/ Friday sessions can signal trading ranges.

With Wall Street back to a full week, volume should pick back up following a 30% drop off over the past few weeks. This, along with marquee companies announcing earnings, should start to produce additional momentum for the bulls, or a breath of fresh air for the bears.

The most important day of the week will be Friday as a number of Financial companies will be reporting earnings. Bank of America (BAC), JPMorgan Chase (JPM) and Wells Fargo (WFC) announce ahead of the open and their results will likely shape Friday’s action and set the stage for next week.

All of the aforementioned stocks have seen dramatic price increases following the election with many of the pros saying this will be a sell-the-news event. While this may be an easy way out to predict a pullback, the exact opposite could happen if financial companies offering raised guidance on better-than-expected numbers.

While I remain bullish on the Financial stocks, Wells Fargo does worry me and one company that always seems to disappoint analysts. Current estimates call for the company earning a profit of $1 a share on revenue of $22.48 billion.

The company has topped estimates in three of the past four quarters by 2 cents, a match, and 2 cents and a penny. However, shenanigans and a change of management was a 2016 skeleton that could come back to haunt them if numbers come in shy.

With shares at double-nickels ($55) a possible strangle option trade might work as a possible trade. The regular WFC January 56 calls (WFC170120C00056000, $0.65, down $0.05) and the WFC January 54 puts (WFC170120P00054000, $0.65, down $0.10) can be targeted for an earnings trade if shares stay flat into Thursday.

These options, together, would cost $1.25-$1.30 at current levels and expire Friday after next. If WFC shares trade above $58.50 or below $51.50 after the announcement of by January 20th, the trade would double as the calls or puts would be $2.50 “in-the-money”.

The break even points for the trade would be if WFC shares are above $57.30, or below $52.70 by next Friday’s closing bell. If shares fall below near-term support at $54 ahead of Thursday, it could be a clearer signal to go short. A move above $56.25 could be a signal to go long.

While I still expect record highs into the end of January, I talked about possible downside targets we needed to watch for on the major indexes. If the December lows come into play, and the VIX closes back above 12.50-13.50, it will be our signal to lighten up bullish positions.

Closed Momentum Options Trades for 2017: 1-0 (100%). All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.

Do not risk more than 5% of your trading account on any one trade but do try to take all of the trades. Please remember, all “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.

Action: Shares reached a peak of $25.11 on Friday and the 52-week high is at $25.42. A close above resistance at $25.25-$25.50 would be bullish for a possible run towards $27-27.50. A close above the latter will get us a triple-digit profit. Support is at $24.75-$24.50 on a move back below $25.

Action: Shares have traded in a tight $8-$9 range since early December with all of the major moving averages in a nice uptrend. Resistance is at $8.75-$9 with a continued closes above the latter, and 52-week peak, a bullish signal. Support is at $8.50-$8.25.

Action: Shares traded up to $19.53 on Friday. Shares have also traded in a narrow range between $19-$20 since mid-December with all of the major moving averages in a solid uptrend. Resistance is at $19.50-$19.75. The 52-week high is at $20.04. Support is at $19.25-$19.

Action: Friday’s high tapped $29..04. Resistance is at $29-$29.25. A close above $30 would be a slightly bullish development and force an early exit. Support has moved up to $28.50-$28.25.

The death cross that formed last week with the 50-day moving average falling below the 200-day moving average was a bearish development. However, I have talked about risk to $29-$29.50 over the near-term. This trade still has plenty of time to play out as the options have nearly 5 weeks of time premium before they expire.

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